Your pricing strategy can make or break your company

I’ve been very busy recently working with several clients, one of which needed strategic assessments of entering the Smart Grid market. And a big part of the assessment had to do with the pricing model for this new vertical.

As you can imagine, pricing model has a direct impact on the top-line, the bottom-line, and sales volume, and can effectively make or break a company – or make it float around in mediocrity, as is sometimes the case.

Before I get into details, I should say that I have no background in consumer goods where pricing is a whole different beast to tackle. I have no idea how the following applies to consumer goods, though I suspect the general principles apply to business uniformly.

Market-based vs. cost-based pricing. Amazingly, some companies still base their pricing model on their cost. Here’s my comeback to this concept: whether a product costs you $100 or $1,000, if the market pays $800 for it, that’s where you should price it. Otherwise you’re either leaving money on the table or pricing yourself out.  If you can’t make the desired margins, you need to create value, change your target market, or change your offering.

Creating value. The market pays for value, and you can’t expect it to extract the value from your offering without your help. Every target demographic needs to be considered in creating the value. Whether it’s the ‘cool’ factor, functionality, reliability, time-savings, cost-savings, or otherwise, clearly communicate the value to each set of your demographics. Products don’t sell themselves, people sell them – and they do it by creating value. Tactful positioning comes in handy for creating value. Apple is a company that consistently does a great job at creating real value (great products) plus perceived value (cool factor).

Competition. It shouldn’t be a surprise that if there’s little competition in your market, you can charge higher for your products and services. Needless to say, you need to continually monitor your market for competition. And if your market finally does get targeted by competition, value creation will help you edge ahead of them.

Price wars. Alternatively, in markets with a lot of competition, it’s easy to fall into the “price war” trap. This is typical in commoditized markets, or those in which innovation has worn off (like the PC market). The best way to avoid price wars is to add value, reposition, or accelerate innovation. Without continued innovation, value eventually wears off. Sometimes it’s not worth staying in a market with continual price wars, and it’s best to get out. IBM got out of the PC business mostly for this reason.

Growth markets vs. established markets. The general rule is that growth markets afford higher prices. Market excitement, lack of competition, and the general “first to anything” mentality with growth markets allows for higher prices. Don’t be afraid to use this to your advantage. Eventually, with additional players and sizzle fatigue, prices will go lower.

If in doubt, start high. If you’ve been in the business long enough, you probably have a pretty good idea of the price the market will bear, but in new verticals, this can get tricky, and sometimes it becomes difficult to figure out a good pricing model. When in doubt, start high. The market will quickly let you know if you’re overpriced and you can always lower your prices, but increasing your prices will be much more difficult.

The market talks back – only if your price is too high. As I mentioned, the market will quickly let you know if you’re overpriced. Here’s the trick, it will hardly ever tell you if you’re under-priced. You could be happy selling high volumes of your products not realizing that you’re leaving 20% on the table. How about implementing a better pricing model that will increase your top-line by 20%, or add 50% to your net margin?

Life-cycle pricing. This topic deserves its own article, but it’s important to keep an eye on the market as the product or service grows, picks up momentum, and nears its “end of life”. The product or service needs to be actively re-priced throughout its life-cycle from launch, mid-life, to end-life. For example, production costs or support/maintenance costs could be much higher for older products or services, causing the margins to deteriorate with lowered pricing. Continual business analysis can bring this to light in order to shelf older products and services, and charge more for newer ones.

Lastly, don't be afraid to charge higher for your products and services. Create value and don’t leave money on the table. Remember, you can always lower your prices, but increasing them is much more difficult.

I’d love to hear your stories of pricing genius or mishaps.

8 clues to your company's health: detected in your org chart

I posted this article some time last year, and it is still one of my most popular blogs, regularly getting hits through search engines. I thought I'd update it and give it another life.

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Org charts are fascinating (living, breathing, pulsating) organisms. I didn’t always see things this way. I remember being a number in an org chart and hating it. I was one of 100,000 employees working for Corporation X many years ago, and whenever I looked at an org chart, all I saw was hierarchy. Who reported to whom? Who moved to the side? Who moved up? And why didn’t anyone ever move down? Some people sucked at what they did, and they kept getting “demoted up” – a promotion to get them out of the way.

It took me a few years to understand the true meaning conveyed by org charts: power plays, strengths, and management mistakes. I’ve now seen more org charts than I can count, and I routinely review them as a visual representation of the company’s strengths and weaknesses, and misplaced focus.

A few on my laundry list.

Ownership. I look for “ownership” of every important function on the org chart. If no one “owns” a specific function, who is in charge of it? One of my recent clients had no single person in charge of sales. Why? Because the CEO, the president, the director of sales, and the sales staff were all "in charge" of sales. Once we reorganized and put the director of sales in charge, he cleaned up the organization and focused the team, resulting in significant sales improvements within just a few months.

Organizational depth. Do you really need all those mid-level managers at the company? As is the case with many large corporations, the unhealthy "fat in the middle" takes up a lot of resources and spews out bureaucracy. Legal issues aside, it makes sense to clean out the middle layer every 3-4 years, especially those who have very few staff reporting to them (you know what they look like on the org chart, elongated org shapes with few direct reports). Because of their experience, they can always be reassigned as line managers, special projects, etc., but I say the ones who have been demoted up take a hike.

Marketing. One of the most misunderstood functions in most companies. I personally view it as a more strategic function, but it does span a wide range of strategic and tactical activities. How a company treats marketing says much about their focus. Having a “sales and marketing” department forces the marketing function to become more tactical. “Marketing and advertising” suites brand conscious companies and is tactical by nature. For high tech companies I prefer to see marketing as a stand-alone function and much more strategy focused. For non-manufacturing SMBs, I’d like to see a minimum of one marketing staff for every 15-20 employees. Anything less than that and your sales will suffer.

Sales. It’s amazing how many companies have the wrong sales functions to match their product or service offering. A vertical market focus in the sales department is suitable for sophisticated product lines, and a geographical focus is more suitable for commoditized products. Mixing the two will create havoc. The titles alone portray much about the company’s focus. Have you hired sales, business development, or account managers? Does this match the product line? I recently talked to a CEO who had mistakenly hired account management types to generate new sales. Over a year later, he was still wondering why he was having sales problems. Also, is channel sales separated from direct sales? If not, the channel partnerships will suffer.

R&D. For high-tech companies, I’d like to see a stand-alone R&D organization. Mixing R&D with Engineering dilutes the strategic focus of the company. The engineering team takes the product to launch which is tactical by default. R&D needs to focus on future product lines and shouldn’t get bogged down by day-to-day tactics.

Quality & Assurance (QA). Again, for high tech companies, QA should be separated from engineering, otherwise, product quality is compromised. You need the negotiation between the two groups, and having one function report to the other doesn’t work well.

Human Resources. I’d like to see this as a straight line to the top management (president, COO, or CEO). Most companies organically leave the human resources function under the CFO or VP of Finance. This shows cost consciousness and lack of focus on human resource development.

Operations. Another area that routinely falls under finance to keep the costs down. This should also be a straight line to the top (or in smaller companies, handled by the top position in the company), as it spans the entire company. Operations and finance should be in position of negotiating together and one reporting to the other compromises operational efficiency.


I’d love to hear your stories. What do you see on your company’s org chart? Does it match your company’s mission and corporate values? If not, it might be time for change management (let's talk!).

And let’s hope “demoting up” is eliminated for good. Please tell me it is.

Branding in a green world: how to target a wide audience with green products

I asked Leon Kaye from www.GreenGoPost.com to guest blog for me this week. Leon is one of the few voices that hold the fine line between “green” progressiveness and business pragmatics.

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Despite the economic downturn, companies and consumers continue to demonstrate an interest in green products and sustainable business practices due to concerns about energy independence, the world we will leave for future generations, waste management, environmental pollution, and the general desire for a healthier lifestyle.

Unfortunately, many companies offering “green” products have difficulty in communicating their message properly. Some simply fall into the trap of slapping such labels as “natural,” “green,” and “eco-friendly” like logos on their products. Others determine that the “green” consumer segment is too narrow to pursue. And meanwhile, the pitfall of screeching “WE’RE GREEN!” to the market may turn away shoppers who are averse to sanctimonious preaching.

Companies often become frustrated in identifying a strong green brand because of their failure in two areas:

- Brand attachment: developing a strong emotional attachment between their brand and their customer base.

- Target audience: conveying a broad solution for the general market without zeroing in on a specific consumer behavior or trait.

Brand attachment involves four stages of consumer behavior. Let’s use the supermarket chain, Trader Joe’s, as an example:

Brand consciousness. The customer hears a TJ’s ad, starts shopping there, enjoys the consumer experience, and appreciates the fact that they offer organic or vegetarian products.

Brand preference. Over time, the customer determines that shopping at Trader Joe’s makes him/her a healthier person, and feels their products are reliable and well-priced.

Brand dedication. The customer internalizes the TJ brand’s core values and messages, and believes he/she is in the demographics to which TJ markets: single person or young couple who live the bourgeois bohemian (bobo) lifestyle.

Brand affection. Even if the competitor has better prices (Fresh & Easy) or superior quality (Whole Foods), the customer’s commitment to TJ’s is such that he/she becomes a proud alpha-consumer, and will happily pay a premium for their goods.

The goal of attaining a strong brand attachment is reaching the last stage. Many companies in the green space try to skip from steps 1 to 4 by slapping on a few trendy words or a tagline in their marketing efforts. But in order to forge a brand identity that will strongly resonate with their customers, they need consistent branding practices that gradually drive the customer from the “brand consciousness” stage to the “brand affection” stage.

The second point of branding, target audience, is a bit more difficult. The idea is to become indispensible to a wide spectrum of consumers. Without appealing to a wide audience, the company and its products become marginalized within a narrow market segment, and fail to generate optimum revenues.

San Francisco-based Method tackles this issue brilliantly. Method’s products are 100% plant based and are offered in recycled plastic bottles. Their product line is about as green/eco-friendly/sustainable/natural as you can get. Nevertheless, you do not find these overused terms in their literature. Note their tag lines: “people against dirty” and “a cleaner clean.” Method’s management has found that consumers will pay a premium for quality, and their products convey technology, cleanliness, intelligence, and innovation – appealing to a wide audience.

Their strategy has worked. Who buys from Method? Parents who want a clean environment for their children, young professionals who want their space to smell good, real estate agents who want to buy nice housewarming gifts for their clients. And they buy Method’s products through Target, Lowe’s, Costco, and Bed Bath & Beyond: stores that appeal to a wide audience, and are known for their competitive pricing while selling environmentally friendly products without bombarding consumers with bland “green” messages.

These points are just the beginning in building a strong green brand. The main idea is that being green is more than putting a leaf on the bottle and saying you are saving the planet: your company’s brand needs to demonstrate inclusiveness while making customers feel that you are making their life easier. It’s great to recycle, but companies need to stop recycling the same old tired words.

If you or your clients have asked you to work on a green branding or marketing campaign, we would like to hear your experiences!

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With 15 years in sales training and international business development, Leon Kaye has most recently developed corporate sustainability strategies and training programs. Earlier in his career, he lived in South Korea in the mid-90s. Mr. Kaye then moved back to the US to lead IT and sales training projects, and later, he sold business services to large corporations. A Silicon Valley native, he currently lives in Los Angeles, where he is editor of www.GreenGoPost.com and leads GGP Media.

Why branding strategy and change management are inseparable

Happy 2010! I wish you all the best, health, success, and prosperity this year and beyond.

I’ve been quiet over the past few weeks mostly because of the holidays, but also because I’ve been insanely busy with strategic branding projects for two clients. People think of a brand in terms of a name and a logo – generally a visual look along with a name that’s recognizable, like Coca Cola or IBM. But Coca Cola and IBM didn’t become what they are from their names or logos.

Here’s how I define a brand: an identity. And an identity is a lot more than a name and a logo. It’s how the company operates, how it’s perceived, how it sees itself. It’s an all encompassing exclusive idea that is embodied in all the offerings and communications, and has the power to change perception and preference. It switches rational analysis to an immediate emotional reaction.

Case in point I: Apple. An all encompassing brand, provoking immediate emotional reactions.
Case in point II: Enron. An all encompassing brand, provoking immediate emotional reactions.

See how powerful a brand is? (yes, a brand can be negative – remember, it’s an identity)

In order to strategically brand (or rebrand) a company, i.e., discovering its identity, three criteria need to be examined:

1) Where is the company at?
2) Where does it need to be?
3) How is it going to get there?

The reason for the breakdown is that the business world is non-static: companies change, product offerings evolve, executives (and therefore their strengths) move around, new markets develop, old markets get commoditized. And sometimes in a short amount of time, a company can find itself in the wrong space in the market with little customer traction and downward revenues.

Where is the company at?

This is probably one of the more difficult exercises for companies to perform (I compare it to therapy). It involves taking a deep look at your strengths and weaknesses in the product line, the service offering, the staff, and the operations to answer the question: who are we and what is our purpose? How an organization identified itself, say, 5 years ago, can be drastically different from its current position. And because of the dynamics I mentioned, this exercise often uncovers surprises along the way (that shouldn’t really surprise anyone).

Where does the company need to be?

This involves taking the binoculars and taking a far and wide look at the market and where the company needs to be. Two major mistakes are made in this exercise:

1) Going after a busy space with a lot of competition (if they’re all selling red balloons, we should be doing the same). This can be the topic of several blogs on its own, but the idea is to move into an empty space: less competition = more money.

2) Not moving far enough from the current position. It’s easy to stick around where you are, but if where you are is such a great space, why aren’t you making money? This takes a lot of guts and ambition, but sometimes where the company needs to be is far away from its current position. As long as the expectations are reasonable and realistic, it’s best to be honest about where the company needs to be regardless of how hard it’ll be to get there.

How is the company going to get there?

Believe it or not, this falls into place faster than most people expect. Once the picture is clear as to where the company is and where it needs to be, the actions that need to be taken become very clear, very fast. This is where change management comes into play: shuffling the staff, redoing the product line, repositioning the company, and communicating internally and externally. This is an emotional process that I’ve written about it in the past, but it is very rewarding with the right tools and processes in place.


The visual identity, corporate messaging, product naming, and a host of other activities that are typically considered “branding” are the result of the changes that occur as the company defines its identity and its place in the world.

This is a scratch on the surface for branding/rebranding companies – there’s so much more that comes into play which makes our jobs more interesting and rewarding. But I want to leave you with this: if someone tells you they are a brand strategist, the first thing you should find out is how much they know about change management. It’ll save you a lot of headache down the line.

HP CEO, Mark Hurd, speaks from both sides of his mouth: cloud computing good for the customers, but not for HP

In my very first blog on The Directive, I wrote a not-so-nice article about Mark Hurd, the CEO of HP. The blog was a reaction to Hurd’s major cutbacks in HP’s R&D expenditures, and the idea was that by cutting back on R&D programs, HP would lose its innovative edge and corner itself into commoditized markets. I find myself perplexed by Hurd again. I have nothing against the man, or the company he leads. In less than 12 hours from publishing this article, I’ll be buying an HP laptop, so there.

This isn’t about laptops though. How much innovation is left in laptops? Or margins for that matter?

In a Q&A with Gartner analysts this week, Hurd made some comments about cloud computing that need major PR damage control. In a nutshell, he said that he doesn’t trust cloud computing due to security issues, and that if HP CIO, Randy Mott, had a big idea and wanted to put general ledger and accounting in the cloud, Hurd “would send him back to work.” He added, “We have 1,000 hacks a day and I can’t tell you why, but they keep showing up. We wouldn’t put anything material in nature outside the firewall.”

Really?!

This, coming from the CEO of a company that is heavily pushing cloud computing into the enterprise markets, and boasts articles and brochures about “Cloud Assure” for “enabling business confidence in the cloud.”

Wouldn’t you know, I have a few thoughts on this.

Thought #1. HP needs to think about why its customers should believe in cloud computing if HP’s own CEO doesn’t. Sales rule #1: believe in what you’re selling.

Thought #2. Millions of internet users trust in their banking and brokerage firms keeping their financial data in the clouds. If Fidelity and Wells Fargo have figured out how to keep client data securely in the clouds, shouldn’t HP be miles ahead of them? This is the company that’s developing the technologies for cloud computing in their R&D labs.

Thought #3. I work out of a small office on a single computer (sometimes two), and I get hacked several times a day (I know this because my computer is set to alert me with that annoying ding whenever a hack has been attempted). I have relatively inexpensive software to protect my computer and my data. 1,000 hacks a day on HP? I’m sure someone at HP’s IT can figure out how to deal with this. You can’t control the problem, but you can control the solution.

Thought #4. Cloud computing is here to stay. Instead of open expressions of doubt about this market and related technologies, shouldn’t Hurd discuss how HP is working to alleviate the problems in this relatively nascent market through innovation and technological excellence?

Thought #5. Google will lead the way and leave the rest in the dust. Enough said.

Thought #6. HP needs to ponder Thought #1, really really hard.

HP is on my radar screen because I followed the company’s product line competitively for many years. I have the highest regards for the company and its culture, but I want the company to show some signs of innovation again.

Bring back “HP invent” any time!

More than hierarchy, organizational structures reflect corporate values and… hidden problems

Org charts are fascinating (living, breathing, pulsating) organism. I didn’t always see things this way. I remember being a number in an org chart and hating it. I was one of 100,000 employees working for corporation X many years ago, and whenever I looked at an org chart, all I saw was hierarchy. Who reported to whom? Who moved to the side? Who moved up? And why didn’t anyone ever move down? Some people sucked at what they did, and they kept getting “demoted up” – a promotion to get them out of the way.

It took me a few years to understand the true meaning conveyed by org charts: power plays, strengths, and management mistakes. I’ve now seen more org charts than I can count, and I routinely review them as a visual representation of the company’s strengths and weaknesses, and misplaced focus.

A few on my laundry list.

Ownership. I look for “ownership” of every important function on the org chart. If no one “owns” a specific function, who is in charge of it? For example, if everyone thinks they’re involved in strategy but there’s no person/group assigned to it, trust me, it ain’t happening. Wondering why the company has no direction? Look for “strategy” ownership on the org chart.

Marketing. One of the most misunderstood functions in most companies. I personally view it as a more strategic function, but it does span a wide range of strategic and tactical activities. How a company treats marketing says much about their focus. Having a “sales and marketing” department forces the marketing function to become more tactical. “Marketing and advertising” suites brand conscious companies and is also tactical. For high tech companies I prefer to see marketing as a stand-alone function and much more strategy focused (“marketing and strategy” organization?). For non-manufacturing SMBs, I’d like to see a minimum of one marketing staff for every 15-20 employees. Anything less than that and your sales will suffer.

Sales. It’s amazing how many companies have the wrong sales functions to match their product or service offering. A vertical market focus in the sales department is suitable for sophisticated product lines, and a geographical focus is more suitable for commoditized products. Mixing the two will create havoc. The titles alone portray much about the company’s focus. Is the title called sales, business development, or account management? Does this match the product line? Is channel sales separated from the rest? If not, the channel partnerships will suffer.

R&D. For high-tech companies, I’d like to see a stand-alone R&D organization. Mixing R&D with Engineering dilutes the strategic focus of the company. The engineering team takes the product to launch which is tactical by default. R&D needs to focus on future product lines and shouldn’t get bogged down by day-to-day tactics.

Quality & Assurance (QA). Again, for high tech companies, QA should be separated from engineering, otherwise, product quality is compromised. You need the negotiation between the two groups, and having one function report to the other doesn’t work well.

Human Resources. I’d like to see this as a straight line to the top management (president, COO, or CEO). Most companies organically leave the human resources function under the CFO or VP of Finance. This shows cost consciousness and lack of focus on human resource development.

Operations. Another area that routinely falls under finance to keep the costs down. This should also be a straight line to the top (or in smaller companies, handled by the top position in the company), as it spans the entire company. Operations and finance should be in position of negotiating together and one reporting to the other compromises operational efficiency.

Legal. For mid sized companies and up, it makes sense to have an in-house council group. Small companies with high transactional activities (licensing, for example) or high focus on IP development (patents) can also use at least one in-house council.

I’d love to hear your stories. What do you see on your company’s org chart? Does it match your company’s mission and corporate values? If not, it might be time for change management (let's talk!).

And let’s hope “demoting up” is eliminated for good. Please tell me it is.

The electric car industry mimics the internet era

Back in the mid 90s, I attended the first Internet World trade show at the LA convention center. I’d been working in high-tech for many years then, and I didn’t know what to expect. I remember the feel of the show was unlike the typical high-tech trade shows of the time (remember the loud music, and the dancers and the clowns at COMDEX?). This show had a quiet atmosphere. The show floor was dotted with small booths attended by youngish lads and very techie IT types. These people were super excited by the internet and its possibilities: graphics, photos, and large files moving around and residing on servers accessible by all. Streaming videos, advertising, and mass online retail were unthinkable at the time. This is back in the dial-up days. The infrastructure for internet as we know it was non-existent, and major high-tech companies were merely watching the market.

Two to three years later at the same show, none other than Microsoft, IBM, AT&T, MCI, Adobe, and a slew of other blue-chip companies edged out those geeky looking guys with their huge booths and displays of the next best pipelines and content “delivered to your home!”

Last night I was invited by an ex-colleague to attend the plug-in trade show in Long Beach. Again, I had no idea what to expect. And as I walked into the show floor, I experienced a major flashback to my first Internet trade show. Same quietness and sparse look to the show floor, same techie feel, same enthusiastic crowd.

True, there have been problems with batteries in the past, but major advances have been made over the last few years with lighter and much more efficient batteries developed by the likes of NEC and Nissan. True the infrastructure for mass scale “refueling” of electric cars is somewhat non-existent, but several manufacturers of refueling stations have already made installations in parking lots around town. And of course those solar panels will come in handy.

And the cars no longer look toyish, and are becoming increasingly affordable. They display respectable performance and acceleration, and in the words of one of the panel speakers, are “sexy” and “cool!”

Most importantly, the government’s stimulus money is fueling this sector. The cash for clunkers program has already generated 250,000 fuel efficient vehicle sales, and the administration has set aside billions of dollars in various forms of stimulus to increase investments in this sector (through matched investments for R&D, tax rebates for buyers, etc).

And the industry players are starting to play. Yesterday GM announced that Chevrolet Volt will get 230MPG rating from the EPA, and not to be outdone, Nissan responded that the same calculation will yield 367MPG for its Leaf car. The industry expects 12-18 additional model introductions soon. And there are myriads of solutions to convert hybrid gas/electric cars to pure electric cars with much better mileage.

Whether or not the traditional MPG numbers make sense for electric cars is another story. The real story is this: the electric car is here and it’s getting serious traction. Is the technology perfect? No. Are all the players here to stay? No. Is the infrastructure ready now? No. But the real players haven’t fully started playing yet, and the unknown players of the future are being formed. Once they do, the pieces of the puzzle will naturally fall into place.

I have a hunch this will happen sooner than later. In 5 years, will we wonder why we even questioned the validity of this market? I believe the bell shape of market adoption for electric cars is beginning to experience the up movement of its left side. Though the rest of us may view this as a mere experiment, the early adopters are feeling the move. And it feels real.

In a few years, I envision the trade show attended by BMW, Toyota, Ford, and other major auto industry players joining forces with utility companies, solar panel players, and unknowns of the future edging out those nerdy guys with their massive displays for electric infrastructure and sexy electric cars “delivered to your home!”

The Mind of the Entrepreneur

After working within, with, for, or around corporations for over 20 years, I think I have a good handle on how things work in that environment. Roles are defined. Territories are drawn. Timelines are (mostly) prepared for. Corporations don’t all tick the same way, but there’s an order to the madness. There’s definitely madness, but order too.

This is how it goes.

The strategists stand atop the hills with their binoculars, and take the news to the guy sitting behind the hill at the big desk (the CEO) that the course of action to find the mountain of gold is north-to-the-northwest. They send out the land surveyors (market researchers) to come back with the topography and news of the people of the land (focus groups). Product managers are engaged to measure, define, and map out the course of action. They navigate up and down the hills to ensure safety and reliability of the road to be built. Teams and teams of road builders (engineers) are brought in to build the road. The engineers complain about the roadmaps. They complain about the timelines. They bang the product managers on the head, and the product managers bang them on the head. In the meantime, the crazy speed drivers (sales) are anxiously awaiting the completion of the road project so they can jump on the road and get to the destination to get their cookies (commissions). The one with the most cookies gets his name on the top of the corkboard in the coffee room, and that’s really important. Their coach (the sales VP) used to be one of these speed drivers himself, but he’s either too old or too tired to do that crazy stuff any more (and hey, it's a good title!), so he waits for his drivers to bring him some of the cookie crumbs.

Fine.

The engineers discuss every ¼ inch of the road. If it’s not built properly, the speed drivers won’t make it all the way to the end. The product managers wonder why they don’t get any cookies if they know the road better than anyone else. The cheerleaders (public relations) await at the roadside with their pompoms to let the world know of the team’s progress. The bean counter (CFO) complains about high food and water consumption ($$). A group of elders at the bottom of the hill (the board) complains to the guy at the big desk (CEO) that the other team (the competition) is building their road faster and better. The strategist is called back to the desk of the guy sitting behind the hill (CEO) and convinces him that he has sent spies (market analysts) to the other side and ensures him that there is more gold at the end of this road than anybody else’s.

It works. Things somehow work out, and sooner or later, the crazy drivers are on the road jamming towards north-to-the-northwest.

Enter the entrepreneur.

He’s heard there’s some gold in the valley.

With a couple of his college buddies, he takes a backpack with some food and water, and hits the valley. The strategist says, you have no idea where you going. And he says, I’ll figure it out, you’re taking too much time analyzing. The bean counter says, you don’t have enough food or water. And he says don’t worry, we’re lean and mean; we’ll survive. The product managers say, you don’t have a roadmap, how will you get there? And he says, process, process! I’ll figure it out. The land surveyors (market researchers) don’t talk to the entrepreneurs. They don’t get along. The engineers say, you need a road to drive on. And he says, I’ll walk through the dirt and the mud, and I'll make it.

Bloody and thirsty and tired, halfway through the valley, they run into some people with piles and piles of food and water (VCs). They return to the engineers and convince a few of them that if they go hungry and thirsty for a while, they’ll have a pot of gold at the end of the project. The engineers build a dirt road (prototype) and with much enthusiasm, the entrepreneurs convince the VCs that if they give them enough food and water, this road will take everyone to a huge mountain of gold. The VCs who are more accustomed to counting their food and water than building roads decide that the vitality and enthusiasm of the team will get them to the gold. And, hey, they have a dirt road to drive on!

Factoids: Len Bosack and Sandy Lerner presented their new product to over 120 VC groups to finally get funding. Their company: Cisco. eToys, one of the failed darlings of the dot.bomb era, was backed by sterling VC names such as Idealab, Highland Capital Partners LLC and Sequoia Capital Partners.

OK, back to the entrepreneurs.

You can say that they’re kind of crazy. With a lot of drive and immense optimism, and an appetite for risk taking, they are convinced that they’ll make it to the end. Bloody and thirsty, they navigate unknown territories in pursuit of their dreams. So do they make it? Mostly not. Reports show that over 50% of new ventures don’t make it past the first five years. I find this a conservative number since it doesn’t account for all those “garage” projects where the family savings is depleted, the credit cards are maxed out, and the parents, uncles, and grandparents have “invested” in the enthusiasm of their loved ones. Risk baby, it's all about risk.

You just can’t learn this kind of crazy. Which reminds me… if you’re a 26-year-old with a degree in “entrepreneurship”, just know that these educational programs are developed by high-brow universities to make your parents feel better for forking out exorbitant fees for your education. You might be better off buying yourself a nice suite to hit the interview trail. I'm just saying.

Factoid: both Bill Gates (Microsoft founder, in case you hadn’t heard) and Fred Smith (FedEx founder) dropped out of Harvard to pursue their dreams.

No, you can’t learn this kind of crazy.

Not counting the taco stands and the plumbing shops out there, there are a lot of successful entrepreneurs around us. Their success is the result of a combination of perseverance, intelligence, luck, and knowing when to seize their luck. And serial successful entrepreneurs must have a better sense of order, a better sense of how that road should be built, and where it should go. Serial success definitely doesn't happen by accident - risk or no risk.

So next time you run into an entrepreneur, please do them a favor and hand them a bottle of water. They’ll thank you for it. And you just might get lucky with a few gold coins when they’re done.

Disclaimer to my clients: the characters in this blog are purely fictional and are not based on any real or partially real people I’ve ever come across in my real or imaginary work life.

Note to Apple: Pssst…. This is what Commoditization Looks Like

When I was at college in the 80s (whoa, did I just give away my age?) my brother who had just graduated from college bought a brand new PC. Price tag: $2000. That’s $2000 in the 80s when the consumer had a comfortable choice of brand new cars well under $10,000. Which begs the question, how come cars are so expensive these days? But I digress. This isn’t about cars.

Back to the PC. I asked my brother to jog my memory and he couldn’t remember its exact configuration, but he did remember that it had no hard drive, worked off of a floppy disk (720K?), with a wild guess of 8K of RAM (not 8M, 8K!).

The price of a fully loaded Dell laptop in 2009: as low as $445. I won’t even get into the details of the configuration. You can practically carry your life on the cheapest laptops these days. My brother’s old PC couldn’t even handle my college reports.

That’s what commoditization looks like.

When HP launched its first DeskJet printer in the late 80s, it was the least expensive non-impact printer introduced to the market, and it ran at 2 pages-per-minute (2ppm). Price tag: $995 (again, in the 80s dollars).

For $1000 in 2009, HP sells a 30ppm networked printer with full color capability and fancy paper handling.

That’s what commoditization looks like.

Granted, there’s a huge difference between the hardcopy (printer, copier) and the PC business models. While PCs provide very little residual income for manufacturers, hardcopy equipment manufacturers count on “per box” toner revenues of at least double the MSRP of the box, more for color printers (aptly named the razor/blade business model).

Fast forward to Apple’s iPhone.

When Apple launched iPhone in 2007 (seems like much longer than that, doesn’t it?), it was the edgiest widget of the century. This time it wasn’t just the “Apple heads” that lined up around the stores to buy one, everyone wanted an iPhone. Price tag for an 8GB iPhone: $599.

Last week Apple announced it will sell its 8GB iPhone for $99, and it’s guaranteed to have a lot fancier features than the original iPhone.

Yeah, you got it. That’s what commoditization looks like.

Note, the steep price drop occurred a little over two years after the original iPhone launch. Products and services are getting commoditized faster and faster due to globalization (from cheaper development and manufacturing costs), shortened product lifecycles, and increased competition.

What’s happened is that iPhone finally has a venerable competitor in Palm Pre (remember Palm, the original widget king?). Palm Pre has compared well against iPhone, and it won’t be long before Palm and others launch even more competitive products driving iPhone prices much lower. (And they’re all guaranteed to offer “cut & paste” too! Honestly, what’s that about?)

Apple has been through this before. Its original Apple computer fell victim to PC’s popularity where Microsoft and PC manufacturers’ strategy of incremental improvements and continual price drops kept Apple’s market share perpetually at or below 10%. This time it’s different. Apple’s “one two” punch with iPod and iPhone will keep the company’s momentum forward for a while. And the business model for iPhone is similar to hardcopy products. Residual income from AT&T’s subscriptions and a massive library of third party software and iTunes revenues will keep the business model healthy for quite some time. But with tense competition both on the product price and subscriptions, expect Apple's revenues to start showing signs of erosion.

In the meantime, consumers will enjoy lower prices for handsets and service subscription costs, more advanced features, and more manufacture and service provider options to choose from. Welcome to commoditization!

Which brings me back to this: how come cars are so expensive these days?

Everything I wanted to know about approaching an M&A deal, I learned from Dating

With every economic downturn, there’s a flurry of mergers and acquisitions as a result of lowered market value, lower-tiered companies threatened to fall off the grid, and companies with a cash hoard searching for bargains.

With this in mind, it occurred to me that approaching M&A deals mirrors dating in many ways. Here are a dozen parallels I thought about. Feel free to add anything I might have missed.

1- Be wary of virgins. Most of you are probably too old to remember, but let me remind you: house of pain. If at least one of the participants has never been through an M&A deal, there’s great potential for misunderstandings and misfires. If you’re dealing with an M&A “virgin”, take your time, take the lead in communicating the plans, and watch every step of the deal. If you’re the “virgin”, educate yourself and surround yourself by trusted advisors who will guide you on what to expect.

2- Make sure you share core values. If you were raised in a hippie family and your date is from an ultra-conservative family, it makes for a good Hollywood flick, but you know in real life you have lots of work ahead of you. Make sure to evaluate the company’s corporate culture, fiscal management policies, long term strategies, and other core values that need to fit your company’s value system for a healthy deal.

3- Heed the early warning signs. Remember that guy who checked out every woman who walked through the restaurant on your second date? Sure he was cute, but you knew better. I once witnessed a deal where the acquiring company had hit a wall with lack of growth and few new products in the pipeline. The SVP of sales and marketing had quit over the weekend never to return, the CEO was under intense pressure from the board to increase top line results, and the company was on an acquisition spree. Some of the targeted companies had noticed the warning signs but went ahead with the deals anyway. Needless to say, some of those deals went south in no time. Has the company you’re considering recently lost key employees, major customers or partners? Are they playing their cards too close to their chest? Are they having trouble refreshing their product line? Have they seriously reduced their marketing and advertising activities? May be time to step back and reevaluate the situation.

4- Don’t act out of desperation. Nobody wants a desperate date around. They’ll either dump you or take advantage of you. Evaluate your internal problem areas and perform serious needs-based and strategic analysis. Sure, times are tough, but is a merger or acquisition the answer? Instead of focusing on M&A activity, your company’s collective energies may be best redirected to fixing internal problems. This will help you avoid desperate decisions and will also increase your company’s market value for a possible deal.

5- Be firm but flexible. I once sat across the lunch table from the two top principals of a private software company whose acquisition had just fallen through over 3% of the deal. It was a deal of their lifetime, but it turned out they suffered from the “virgin” syndrome outlined above, and their attorney had flexed his muscles over 3% of the deal causing the other side to walk away. Ouch!

6- Communicate, communicate, communicate. Do I really need to remind everyone what is the number one topic in couples counseling? Does each side understand the reasons the other side wants the deal? Are the long term goals aligned? What is the integration strategy? Which organizations or products lines are going to get cut? Are you going to be OK with the resulting pecking order? How do you plan to retain talent? And finally, what’s the exit strategy if things don’t work out? Prenuptials anyone?

7- Don’t be too shy to investigate thoroughly. You know how you get a sharp new understating of the person you’re dating once you meet their friends and family? Companies wear their “best suits” when approaching an M&A deal, but don’t be afraid to talk to their employees, their customers, their partners, vendors, and industry analysts who cover them. You’d be surprised what you can find out simply by asking.

8- Consider long term gains over short term excitement. We’ve all been there when fireworks go off and long term plans take a backseat to the short term euphoria. Before you hear the champaign bottles uncorking, ask yourself, is the deal going to realize your targeted combined value? Is it going to be commercially attractive? Can you live with it on a long term basis? (have I stressed the “long-term” view enough times in this blog?!)

9- Don’t drag your feet for a good catch. If the hottest credible bachelor in town approaches you, don’t act coy or dilly dally. Case in point: Microsoft and Yahoo!. Enough said.

10- Sizzle attracts, but character makes the deal. Sure, it’s exciting to have a chat with the best looking, best dressed, most charming guy in the room, but it’s usually the average looking guy who’ll go the extra mile to keep you happy and sticks with you through thick and thin. Don’t get too excited by a company’s sizzle (remember the dot-bomb days?), and likewise, don’t get turned off if a “meat and potato” company approaches you for a deal. Look under the hood. You might be surprised at what you’ll find.

11- Don’t look for the deal to fix all your problems. Unhappy with life? Financially unstable? You think a relationship will fix that? Think again. Take a hard look at your internal operations, know that your problems are yours to own, and don’t expect another company to fix all your problems. Similar to point #4: work out the issues prior to the deal, and you’re in for better rewards.

12- Don’t get too excited by cheerleaders. Your parents want grandchildren. Your friends want you to go on double dates with them. But you’re the one who’ll end up living with this guy. Investment bankers are cheering you on (heck, I would too for those commissions), your top staff is excited, everybody is on their best behavior, but does the deal make sense? Make sure your advisors and intermediaries know what they’re talking about and have your best interest in mind. Any entity with an incentive as a % of the deal should be suspect no matter how well intentioned they seem. At the end of the day, you’re the one stuck working out the kinks after the deal is closed.


Food for thought: more than 50% of M&As don’t realize significant shareholder value, closely mirroring the US divorce rate. Coincidence?

Share your thoughts.

Is HP’s CEO, Mark Hurd, stifling innovation?

When I worked at Xerox many years ago, our division (unsuccessfully) competed with HP’s printer division. HP was the king of that sector, and all we could do was idolize the company and grapple for the dust they left behind. As masters of innovation, they drew the maps for everyone else to follow.

I hadn’t followed HP closely for some time, so when I ran into a profile of the company and its CEO in NY Times recently, I was a bit perplexed. Mark Hurd, who was brought in as the anti-Carly from NCR (not exactly the beacon of innovation), is known as a calculating left-brainer, obsessed with operational efficiency, and someone who would rather talk in numbers than words.

This worked out well for some time. Silicon Valley companies are not known for their operational efficiency, and this helped HP stay lean. But there’s more in the article. Since he arrived at HP, the HP Labs “has whittled down the number of projects it tackles at any given time to 30, from about 150”, and according to some employees “the willingness to take risks has faded”.

Really?! Is this HP, the “innovation company”? What did ever happen to the “HP Invent” mantra?

The core of HP’s products are in mature, highly commoditized sectors: printers, PCs, servers, storage devices, etc. And the problem with commoditization is the vicious cycle of continual price reductions feeding back into commoditization. Cost cutting becomes essential if the company is to survive, but the way to break this cycle is to feed innovation, to develop new technologies and product lines in order to ensure future revenue growth.

I thought I’d compare HP’s R&D expenditures to a couple of other companies: IBM, a tech behemoth, and Apple, the poster child for cutting edge products; and the results are quite surprising.

Here’s a look at how much each company spends on R&D as a % of revenues (common benchmark).

IBM: 6%
HP: 3% (lowered from 4% a year earlier)
Apple: 4%

Not a pretty picture for HP. IBM’s % is double that of HP’s. In fact, IBM spends over $6B in R&D annually (vs. HP’s $3.5B), and the result was that in 2008, IBM was awarded more patents than any other company. Apple has increased R&D expenditure by over 20% year-over-year but its % looks low because revenues also accelerated at a healthy pace.

And here’s a look at another (less popular) metric, the amount of R&D each company spends per employee.

IBM: $15,600/employee
HP: $10,900/employee
Apple: $40,600/employee

Even an uglier picture for HP, and a big WOW for Apple (this also shows that Apple has significantly higher revenues per employee – talk about efficiency!). But even if we assume Apple is an anomaly, IBM spends about 45% more in R&D per employee than HP does – those patents didn’t come out of thin air.


By the time Hurd took over in 05, HP’s stock was already on an upward swing, and it continued its upwards move. Reasons for the rise: general market conditions, Hurd’s cost cutting measures, and top-line improvements from the Compaq acquisition, among other factors.

But there’s only so much fat a company can cut out, and right-sizing can help a company’s balance sheet and stock price for only so long. HP has lagged its peers in new and exciting market development. Is it counting on acquisitions to refresh its product portfolio? If not, where will its stock price end up 2-3 years from now? Is HP forced into cost cutting because of its commoditized markets or is it unintentionally digging itself deeper and deeper into the cycle?

Finally, is HP competing on operational efficiency or on an innovation platform? At its extreme, excessive sandbox experimenting can waste valuable corporate resources, but intense efficiency measures and streamlining work better on factory assembly lines, and not necessarily so with high-tech R&D organizations.

This is HP’s post-post-Carly era, and the company needs to plan and execute accordingly. Perhaps Mike Hurd can allow himself to unleash innovation on a massive scale at HP, and allow HP’s talent to start drawing the maps like they used to. It’ll be good for him, and even better for HP.